Don't Miss FOMC This Week

For the past few weeks, the only game in town has been the move in global bond yields, with those in the US leading the way higher.

Remember – going into 2021, it’s not like market participants didn’t expect yields to rise. It was a major consensus view.

So, why all the fuss about the move if it was expected to happen?

The move higher itself wasn’t really so much the concern. Rather, it was the pace of the move, which caused a sharp rise in bond market volatility.

This spilled over into other major asset classes.

According to recent FED communication, it has not been too worried by the rise in bond yields, as they reflect a market pricing in much better growth prospects and cyclical rising inflation (as opposed to secular rising inflation).

The challenge has been the sharp repricing in interest rates.

We’ve seen interest rate markets price in much faster policy normalisation and reflect much tighter financing conditions – with Eurodollar futures pricing in just over three rate hikes for the FED by September 2023, versus pricing in less than one at the end of December and just over one at the start of February for the same futures contract.

So, the big question this week is whether the FED steps in to calm things down – or whether it will take another nonchalant view of the recent price action and risk a further tightening of financial conditions.